3/03/2009 @ 12:00AM

The Public Mischief Of Public Unions

Each new day brings further evidence of a financial breakdown that stems in large measure from the inability of the federal and state governments to live within their means. Unfortunately, the endless attention focused on the ongoing Congressional spending orgy shields from scrutiny the intolerable budgetary pressures that face many of our states, most notably California and New York, which risk entering into bankruptcy on the installment plan.

Much of their distress is attributable to the rich labor contracts routinely extended to public employees as an ostensible quid pro quo for their giving up the right to strike. But the collective bargaining negotiations mandated under state law are always an unfair match. The state, county and local government officials don’t face the certain wrath of shareholders. Rather, they operate in uncertain political waters that allow them to escape voter wrath by granting public employees highly favorable, but less visible, pension packages that become payable only down the road.

One common current payout system for retirees offers an immediate annual pension at age 50 that provides for life “x” percent for each year of past service, while the retiree pulls down a second income on a new other job. Twenty-five years of work at 3% per year generates a lifetime pension of 75%. Often massive overtime payments in the last three years can fatten the pension base. Worse still, these multiples can easily be increased by legislation that provide windfalls to retired workers (who get the benefits right away) under the guise of improving recruitment of new workers who will only get these benefits down the road. Much of the current $40 billion California budget shortfall comes from these dubious pension programs.

So what happens in bad times? First, no public employee loses either a job or a dollar in pension benefits. Ordinary citizens lose two ways: jobs are cut–unemployment in California just hit 10%–and taxes are raised. What makes this pill all the more bitter is that unions happily wave the libertarian banner of freedom of contract to lock in the status quo. Public unions point to court cases that require the state to honor its employment contracts just like other agreements. Translation: The downturn is everyone else’s problem.

This seductive plea of contractual probity ignores the dubious mechanisms that put these obligations into place. State collective bargaining agreements give unions monopoly power; state legislative maneuvers, often backed by pro-union legislators, sweeten the deals already made. These pension deals are never negotiated at arm’s length in competitive markets between parties who are free to go elsewhere. Instead, a monopoly union extracts its compensation packages from government officials, many of whom depend on union support to hold public office. These contracts are the kind of self-dealing arrangements that would never be tolerated between a corporation and its key officials. And the subsequent sweeteners simply take property from the majority of citizens who can neither block the transaction nor withhold their tax dollars.

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Unfortunately, there is today no mechanism in place that allows frustrated citizens to challenge the validity of these agreements either before or after they are put into effect. This grim situation is not unprecedented. Many lucrative and suspect contracts are enacted through special interest politics, which are then locked in place by an appeal to the sanctity of vested rights.

What, then, should be done to stop these chronic abuses? So long as public unions are a fixture of American public life, we need to enforce a blanket prohibition against unearned increases in pensions or wages to public employees for completed work. In addition, new union agreements should be subject to a mechanism that allows any citizens to challenge them in court as giveaways to union workers before they go into effect–say within 60 days of signing. And we have to insist that government officials negotiate contracts that permit them to reduce employment levels in the face of diminished revenues.

The alternatives are too grim. In the midst of major dislocation we’re sure to see more erratic furloughs of service and short-term budget fixes that are an unmistakable sign of a bloated public sector. Worse, the entire system will implode when a shrunken and embattled private sector can no longer nourish an overgrown public system. Libertarian visions of limited government are sustainable. The current malaise is not.

Richard A. Epstein is the James Parker Hall Distinguished Service Professor of Law at the University of Chicago; the Peter and Kirsten Bedford Senior Fellow, The Hoover Institution; and a visiting law professor at New York University Law School. His latest book is The Case Against the Employee Free Choice Act, to be published shortly by the Hoover Institution. He writes a weekly column for Forbes.com.